~ The Incorrigible Market Monetarist

Cryptos and Me

Scott Sumner made a post commenting on a question about a creating a stable crypto. I have a few remarks to share about it, since the topic overlaps with my profession, I have a pretty good understanding of what it’s about.

Many of you are familiar with file encryption, and you know that you can open up your note pad write something like, “Hello World,” save the file, right-click and select encrypt. What that does is scramble the file based on your computer’s self-generated private key. Your computer knows what the key is, and so when you click on the file again, the computer knows what key to use to unscramble it, it opens and you can read it as if it were never encrypted. But if you copied the file to another computer and tried to open it, the file would appear as gibberish because the second computer wouldn’t have the key to decrypt it with.

Coins in crypto currencies are based on the same concept. They are scrambled bits, just like in the example above, but they each have a unique key. Block chain is the underlying currency ledger that keeps track of the keys for each “coin” that is created so that when the “coin” is used to buy something, sold or otherwise transferred, the coin can be validated as authentic.

If you know a little about algorithms, and that they are used in encryption, you can kind of get the idea that once a system for creating a crypto is made, mathematically, only so many keys that can be created from the base algorithm. Thus only so many coins can ever be created. Consequently, per each type, they are more rigid in supply than gold that way.

Given the underlying technology of cryptos, at least as I understand them, it seems to me that the question about creating one crypto currency that is stable in value is self-evidently moot. Because it takes lots of computing power and energy to create even one coin, you can’t just “print” them up like a paper currency. So it’s really hard for me to imagine being able “fix” the value. If anyone ever tried to do this, the cypher would have to be so weak that it may never have any value at all, or worse, anyone and their brother could make them up, destroying any ability to “fix” the value.

I can’t say it’s impossible to do it, but I really can’t imagine it being practical or long lasting, even for some lofty goal as trying make cryptos easier to use. In my view it’s entirely unnecessary when most people have all the computing power they need to be able seamlessly trade their crypto for dollars at any point in time right in their pockets – the smart phone. You could have an array of different types of holdings, and you wouldn’t necessarily have to know which you’re spending, unless you’re picky about which ones get used, and it would happen in the blink of an eye.

If I had to guess, I say is that real problem being answered with the desire to produce a crypto currency that is stable is that perhaps people wouldn’t want to hold cryptos for very long with the market for them being like the wild, wild west. And I’d speculate that it is pribably because there isn’t enough supply of the various flavors there are yet for everyone who wants to use them, and regulatory treatment of them is still rather up in the air. We need more, and it would be nice if governments could establish some sort of framework for regulation (though I’d really prefer that they keep their mitts off ’em).

Quotable Quotes

"The desire is there to do something about difficult problems, but because it is difficult to do something which would help solve them, people do something else instead." -- Dr. Madsen Pirie, Adam Smith Institute